November 2010, Volume: 6

Sensex 20156.89 Nifty 6071.65 Dollar 44.80 Gold 20120.00 Silver 40360.00 Crude Oil ($) 86.34

Investeurs Chronicles

INSIDE
• Current Chronicles
• Cover Story – Micro
Finance
• Open Forum – Multi
Dimensional
Bilateral Relationship
• Emerging Markets
• Outlook – Gold
• Financial Q
• In Focus – Dilma
Rousseff

Investeurs Consulting P. Limited

S-16, U.G.F, Green Park Ext. New Delhi-110016, www.investeurs.com
Current Chronicles
Tata DOCOMO, the GSM arm of Tata Teleservices Limited,
announced the launch of its 3G services in India. It will be
the first telecom player to have launched these services
after the spectrum allocation. Players like Bharti Airtel,
Vodafone, Reliance Communications and others are to yet
announce the launch.
More…
State-run PowerGrid Corporation's follow-on public offer
was oversubscribed 10.67 times till 1 pm on the final day
of the issue,12th November generating demand worth a
whopping Rs 81,092 crore. FPO through which the
government is looking to garner Rs 7,600 crore, has
received bids for 898.4 crore shares against 84.17 crore
shares on offer, More…

Index of Industrial production Industrial growth almost

Videocon Industries along with US-based Liberty Mutual
halved to 4.4 per cent in September against 8.2 per cent a
Group-- a leading global property and casualty insurer with
year ago, pulled down by slow-down across segments.
2009 revenues in excess of $31 billion-- signed a joint
However, Industrial growth in the first half of this fiscal,
venture agreement to enter the non-life insurance
as measured by the Index of Industrial Production (IIP),
segment. The joint venture will provide personal and
stood at 10.2 per cent against 6.3 per cent a year ago.
commercial insurance products through a range of
More…
distribution channels. More…

Glenmark Pharmaceuticals is close to become the first

The state-owned Bharat Sanchar Nigam (BSNL), which
Indian company to develop an original novel chemical
suffered a Rs 2,611-crore loss last fiscal, the first in the
entity (NCE) to treat diseases.
company’s history, has decided to auction surplus
An NCE is a molecule developed in the early drug
capacity on its long-distance network to private
discovery stage, which after undergoing clinical trials
companies, as it attempts to open up new revenue
could translate into a drug that could be a cure for some
streams. More…
disease . More…
C “Derive from the Deprived?”
o
v
Newspapers are buzzing with such reports,
which were not thought of half a decade back.
e
Proponents of microfinance must have never
envisaged crossing paths with equity
r
investments. But, of late, that has become
order of the day (see box at end of the article)
S
Private equity investments in this domain
have been of $230 million in the past two
t “MicroVentures India, a private years, & future looks even more promising.
equity fund that invests in Indian microfinance institutions (MFIs) have
o microfinance institutions (MFIs), reportedly attracted private equity investment
recently loaned INR 30 million totaling INR 3.86 billion (USD 84 million)
r (approximately USD 680,000) to between January and June of this year – an
Indian MFI Swadhaar Finserve.” increase of approximately 15 percent over the
y
first half of 2009. Such massive investment in
a socially oriented sector like microfinance
forces one to wonder if this has become a
Bhartiya Samruddhi Finance business of generating gains on the back of
Limited (BSFL), a MFI and a part underprivileged.
Understanding the basics first. Microfinance
of the BASIX group, sold an INR
or microcredit has been always a part of the
2.5 billion (the equivalent of USD
domestic financial scene, albeit diminutive. It
56.3 million) stake to a group of hogged the limelight, for the first time in
undisclosed private equity firms.” 2006, when the Nobel Peace Prize went to
Bangladesh's Muhammad Yunus and his
“Venture capital firm Canaan
Grameen Bank, which championed the cause
Partners has invested
of lending out tiny, unsecured amounts to
approximately Rs 45 crore in the poor. Since then the idea has catapulted in to
Chennai headquarted Equitas serious money domain with a social rider.
Microfinance.”
“Private Equity in Micro Finance”
MFIs' business model of high interest rates,
and near-zero defaults have drawn investors
from around the world. This coupled with a
wide client base, both existing & future,
turns it in to a virtual goldmine for the
investors. No wonder then, that, Singapore’s
Temasek, CLSA Capital and International
Financial Corp to private equity firms
Sandstone Capital, Unitus and Matrix, has
placed their bets on Indian microfinance
companies, as, SKS, Share Microfin,
Spandana, Ujjivan among others. Further
there has been a surge in the number of
microfinance focused funds like the Lok
Capital Group, Bellwether Microfinance Fund
and Aavishkaar Goodwell, among others.
These funds are dedicated to investing in the
equity of Microfinance Institutions (MFIs) in
India,
Symbiosis
As with investments in other industries, this
too, is a symbiotic relationship, where, both
investors, & the investee (MFIs) stand to be
benefitted. For private equity investor, the
attraction of MFIs lies in two sets of figures:
interest rates ranging from 30% to 60% and
repayment rates exceeding 95%. Together,
they make MFIs extraordinarily profitable.
Cover Story
MFIs have emerged as an investment hot spot previously unbanked individuals to efficiently
for Private Equity (PE) due to its rapid growth access deposit accounts, government disbursals,
and high returns, growing at a Compound insurance products, and even secure payment
Annual Growth Rate (CAGR) of 105 per cent in platforms have been launched as a direct result of
the last five years. investor support. PE investments, also, serve to
The sector covers 100 million people strengthen balance sheets, demand
worldwide with a total loan portfolio in excess corporate governance practices, thereby, resulting
of US$40bn. Initially, growth has been on the in stronger organizations. We have examples of the
back of the traditional funding sources, like constructive role played by private equity in other
grants & donations, but had it not been for sectors. From technology to telecommunications to
commercial capital participation, portfolio more recent, clean technology, PE investments
escalation would not have been this massive. have contributed handsomely to
Rapid growth demands higher investments. productivity of various emerging sectors.
Donation driven & bank led capital sources are In nut shell, private equity brings along scalability,
unable to meet investment requirements of an accountability & transparency in operations.
industry growing at 75% per annum. Over the Where does the poor figures?
past two years, the five largest MFIs in the In such a win-win scenario for both MFIs, & PE
country have been the beneficiaries of players, one often forgets to factor in the real
approximately US$180m in private equity drivers of the sector: the poor. What lies in there
investment, which has helped them to grow for them to gain out of this relationship?
their combined active client bases from 2.2 Advocates of PE investments talk of
million to over 4.7 million, a compound investment in technology, and
annual growth rate of 45%. Four of these competition amongst for-profit MFIs
organizations are now serving well over a increasing participation of private capital which
million active clients each. Private equity is no will result in lower interest rates, a higher quality
longer option, but, rule of the game. of service, and a greater diversity of products.
Then there are additional advantages of Positive impacts of PE investments are aplenty, but
private equity investments too. Numerous new so are its pitfalls. Biggest concern is about the
business models, like, the branchless banking expectations of extraordinary growth rates by the
technologies currently enabling millions of investor. Many fear that this will eventually lead
“Private Equity in Micro Finance”
to drift from original goal of MFIs: lending to
marginalized sections of society. As bigger loan
sizes tend to reduce transaction costs, lending
policies may lead to targeting of more well-off
segments of the population who can service
better bigger loans, thereby, defeating the very
purpose of microcredit.
The other disquiet is slightly opposite to the
first one. PE fund inflow induced aggressive
lending i.e. too much micro credit may lead to
over-indebtedness of borrowers, and eventual
overall
trapping in to a vicious circle of new loans for
servicing older ones. This came in to lime light
when numerous suicides were reported in
Andhra Pradesh.
Now, where?
Concerns around private equity in microfinance
are valid, but, some levy should be attributed to
the prudence of the investor. A default prone
higher loan portfolio, no matter how large, is of no use.
superior This ensures that the interests of private capital
due to are aligned with those of the recipients of MFI
credit - both parties benefit from growing a
quality loan portfolio, promoting greater
operational efficiencies and technological
sophistication, and ultimately from accessing
public capital markets. These benefits all serve
to lower the operating costs of the MFI,
therefore resulting in a lower cost of capital and
Cover Story “Private Equity in Micro Finance”

more efficient service for the end client.

The fact is that with billions of individuals still

outside the purview of financial services,
representing an estimated demand of US$300bn
in loans, the future role of commercial capital will
be even more critical. It has become indispensable
to the growth of microcredit and subsequent
achievement of its entire potential. Quite simply,
there is nowhere near enough grant capital
available to meet the funding requirements of the
world's microfinance institutions (MFIs) as they
continue to scale.
Logically, now the question should not be
“Whether to involve PE firms in the microfinance
sector?” but, “How can we build regulatory
mechanisms so as to ensure the best interest of
the beneficiaries?”
 A multi-dimensional Bilateral Relationship
Relations between nations are shaped by a It is, in fact, possible to arrive at a quantitative Thus, the number for P2P can be estimated
Open Forum

complex interplay of a variety of factors — guesstimate of the intensity and importance of from information pertaining to tourism
historical, geographic, political, economic, the bilateral relationship between various data, migrant population, number of front-
cultural, strategic and so on. Governments countries based on this simple formula. It is page stories in print media, or minutes of
operate within given circumstances and it takes a possible to undertake a more sophisticated and television time devoted to news from that
lot of political energy on the part of any head of quantitatively satisfying exercise by trying to country, popularity of cuisine and culture,
government to alter the nature of a bilateral measure each component in terms of some interaction in sports and so on. In a
relationship based purely on government-to- broad indicators, the way the UNDP’s Human democracy, the media’s view of other
government interaction and relations. Development Report estimates the Human countries is shaped by all the three
Indeed, as Prime Minister Manmohan Singh told a Development Index by using proxies for health, variables, that are P, B and G, and the
meeting of the US-India Business Council in education and livelihood status of people. media, in turn, shapes thinking at all three
November 2009, “In today’s economically levels.
integrated world, economic relationships are the
bedrock on which social, cultural and political BILATERAL RELATIONSHIP INDEX (BRI)
relationships are built. A strategic relationship
Country P2P B2B G2G C2C
that is not underpinned by a strong economic
relationship is unlikely to prosper. On the other United States 5 4 3 12

hand, a web of economic relationships intensifies China 2 3 2 7

both business-to-business and people-to-people
Russia 2 2 4 8
contacts, promoting a deeper and better
understanding between countries. That is the Britain 4 4 3 11

kind of relationship we wish to see with this great France 3 4 3 10

country, the United States.”
Germany 2 4 3 9
The bilateral relationship between countries that
is the “country-to-country” (C2C) relationship is a Japan 3 3 3 9
sum of three distinct, even if interacting, aspects South Africa 2 3 3 8
of such bilateral relations. These three are:
Pakistan 4 1 1 6
people-to-people (P2P), business-to-business (B2B)
and government-to-government (G2G). The NOTE: The scale for each com ponent is 1 to 5, so the highest value
equation can be stated simply as P2P+B2B+G2G = that can be reached is 15 and the low est value is 3, ruling out the
possibility of zero.
C2C.

The B2B variable can be more easily estimated
using data relating to trade, investment,
movement of professionals and workers, joint
ventures and so on. It is more difficult to
quantify G2G, but one can use proxies like
defence purchases/sales, bilateral summits, trade
treaties, cooperation in high-technology and
strategic industries.
Based on these numbers, a Bilateral Relationship
Index (BRI) can be constructed and countries
ranked in order of their importance for India.
Take 10 countries that figure prominently in the
media, and see how they rank on a 1 to 5 scale of
importance. In P2P rankings, the US, Britain and
Pakistan would figure fairly high for different
reasons. The P2P interactions between India and
China, Russia, Germany and even Japan would be
much lower.
In the B2B ranking, the US would now be at the
top, along with countries like Britain, France and
Germany. China, of course, does more trade with
India than most but it would figure lower in
ranking because of the structure of trade, and the
limited extent of real B2B partnership. Japan lags
behind only because it has been a latecomer and
has been a hesitant investor till recently.
However, it is easy to see both China and Japan
improving their ranking on the B2B scale.
Open Forum
In G2G, Russia still remains at the top but with But through his first year in office,
the growing strategic engagement and President Obama did and said things that
increasing defence cooperation between India diminished the trust quotient.
and the US, and now with the decision of the More recently, President Obama has been
Obama administration to lift high-technology trying to retrieve lost ground and take the
export controls, the US is likely to move up very relationship back to where his predecessor
quickly on the G2G ranking. Indeed, 10 years had left it. If he can convince Prime Minister
ago the G2G score for the US would have been a Singh that he means what he says now,
lowly 2 or even 1, against the backdrop of post- unlike when he wrote that letter in 2008,
Pokhran-II sanctions imposed against India. his visit can be declared a success. Winning
It is a testimony to the fundamental change in the trust of India’s Parliament, when he
the relationship, first initiated by Prime Minister addresses it today, the way Dr Singh won
Atal Behari Vajpayee and President Bill Clinton over the US Congress in July 2005 (with 35
and then accelerated by the strategic interruptions of applause in a 39-minute
partnership launched by Prime Minister speech), is the key to getting the G2G
Manmohan Singh and President George Bush number to 5!
that the G2G score for India and the US will
undoubtedly go up. But whether it will be stuck
at 4 or go all the way up to 5 will depend on the
level of “trust” that President Barack Obama is
able to inject into the G2G relationship.
President Obama started off brilliantly with a
well-crafted letter written to Prime Minister
Singh in September 2008, even when he was on
his campaign trail, wherein he said: “I would like
to see US-India relations grow across the board
to reflect our shared interests, shared values,
(Source: Business Standard)
shared sense of threats and ever-burgeoning ties
between our two economies and societies.”
Commodity Prices May Trigger Former
Soviet Rally: Russia Credit
Russian and Kazakh debt is catching up with
the rest of emerging markets as commodities
prices rise after the U.S. decision to add
money to the economy. Russia’s government
bond due in 2015 climbed after the Federal
Reserve pledged Nov. 3 to buy $600 billion in
Treasury securities through next June,
pushing the yield to 2.848 percent today, close
to a record low. Benchmark bond yields in
Brazil and South Africa, two other emerging-
market commodities exporters, reached two-
week and 10-day highs in the same period.
Russia firms up huge natural gas deal with
S.Korea
Russia will ship at least 10 billion cubic metres
(350 billion cubic feet) of natural gas a year to
South Korea from 2017 under a preliminary
deal to be signed 17th November, Moscow's
energy giant Gazprom said.
Commercial talks will start next month on the
deal, Gazprom head Alexey Miller told
reporters on the sidelines of a visit by
President Dmitry Medvedev to Seoul.
When the initial agreement was signed in 2008,
an official quoted by Yonhap news agency said
the gas imports would be worth about 90
billion dollars over three decades.
Emerging Markets
a 3.9 percent advance by the MSCI Asia
New deal to help indebted consumers in South
excluding Japan Index. Foreign investors have
Africa
sold $17.9 million more Philippine shares than
With credit-related court backlogs still sky high
they bought this month, following record net
and 47% of credit active consumers in arrears;
purchases of $631.5 million in October, based
industry players on 11th November unveiled a
on data compiled by Bloomberg going back to
comprehensive set of voluntary measures to
1999.
streamline the debt review process. Proposed
Bolsa Mexicana Changes Rules to Increase
measures include greater transparency between
Trading by Foreigners
credit providers and debt counselors, as well as
Bolsa Mexicana de Valores SAB, operator of
revised repayment terms for over indebted
Mexico’s main stock and derivatives
consumers. These terms have been agreed at
exchanges, has changed rules to make it easier
industry-wide level - a serious compromise by
for foreign trading firms to buy and sell from
the banks which have until now opposed every
outside the nation.
case.
The exchange operator is introducing market
access services to attract more firms such as
Philippine Stocks to Extend Asia's Worst Loss
U.S. high-frequency traders, who already
on Valuation
facilitate more than 20 percent of equities
The Philippine benchmark stock index, Asia’s
volume in Mexico, Chairman and Chief
worst performer this month, will extend losses
Executive Officer Luis Tellez said in an
for the rest of 2010 as investors speculate a
interview at Bloomberg’s headquarters in New
recent rally was overdone, Macquarie Group Ltd.
York. Tellez said he sees the proportion of
said. The Philippine Stock Exchange
trading handled by those firms rising to about
Index jumped 15 percent in September; the
50 percent in the next two years.
biggest advance in more than eight years, as the
economy expanded and investors sought higher
yields amid near- zero benchmark interest rates
in the U.S.
Now, six straight days of losses have dragged the
gauge down 4.7 percent this month, trailing
 Outlook on Gold Outlook
The price of gold powered to an all-time high of US economy, which would result in growth,
$1,419 per ounce as continued global thereby, reducing gold’s appeal for hedging, Call Rates as on 12th November 2010 → 5.90% -
uncertainty coupled with abundant liquidity and subsequent profit booking will bring a 6.74%
(with the promise of more!), a sign the yellow much needed correction. Commodities
metal is gaining acceptance as a form of In the long run, however, outlook remains Aluminum (1 kgs) 108.65
investment. In tandem, the price of gold in the bullish. One leg of this bull market ended at Copper (1 Kg) 392.40
domestic market hovered at close to Rs. 20,000 $1030 in March 2008 when other assets saw
Zinc (1 kg) 108.65
per 10 gm. a melt-down after the sub-prime crisis. After
Steel (L) (1000kg) 25800
As governments cut interest rates and boost that gold market corrected by 45% and
As on 12th November 2010
spending to fight the worst recession since followed an up-move from 2001 low and
ended at October 2008. Forex
World War II, investors worldwide have rushed
Currently, we are in the third leg of the long Forward Rates against INR as on November 12,
to buy bullion as a hedge against inflation and
2010
currency debasement. Gold holdings in run bull market. According to the prevalent Spot Rate 1 mth 3 mth 6 mth
US 44.72 45.04 45.54 46.18
exchange traded funds are at record levels. projected targets, we get the first target at
Euro 61.32 61.76 62.42 63.26
Gold is one commodity for which Indians have $1,867 and the second target at $2,587. Sterling 71.78 72.28 73.06 74.05
Yen 54.41 54.82 55.44 56.26
an insatiable appetite. It has tremendous These are still conservative targets. A blow- Swiss 45.87 46.22 46.74 47.43
demand in the peak of festive season. The high out rally in gold has a much higher target Franc
Source: Hindu BusinessLine
global price has done nothing to curb domestic above $3,000. This is on the back of massive
demand. weakening in the dollar due to previous dose
Libor Rates as on November 12, 2010
In 2009, total Indian gold demand reached $19 of quantitative easing. That is extremely
Libor % 1 mth 3 mth 6 mth 12 mth
billion, or Rs. 974 billion, which accounts for 15 bullish for gold. Gold’s prices are expected US 0.25 0.29 0.44 0.76
Euro 0.81 0.99 1.23 1.51
per cent of the global gold market. After scaling to rise until the US Fed’s policy is Sterling 0.57 0.74 1.03 1.49
the $1,000 mark in September 2009, gold is normalized. Yen 0.12 0.20 0.40 0.63
Swiss Franc 0.13 0.17 0.24 0.52
now up 40% in little over a year. That is almost The 2008 peak of $1,030 will be the key Forward Cover % as on November 12, 2010
double the approximately 20% return from the long-term support for gold. The positive 1 mth 3 mth 6 mth
US 8.71 7.44 6.62
stock market in the year. outlook for this metal and its ability to reach
Euro 8.33 7.14 6.35
Gold has risen a lot and, hence, those who want higher levels will be negated only if it closes
Sterling 8.30 7.17 6.38
to invest can wait for a correction, in the short strongly below the support band between Yen 8.94 7.60 6.86
term. Logic behind that are positive effects of $1,000 and $1,030. Swiss Franc 9.02 7.60 6.85
Source: Homefinance.nl
second dose of quantitative easing (QE2) on the
Financial Q In Focus
1. The first general purpose credit card was issued Brazilian Iron Lady: Dilma Rousseff
by _________.
2. "We are number 2. Why go with us? Because we
try harder". Which brand was this No.2?
3. Areez Khambatta in Ahmedabad is credited
with being the man behind which famous
Indian brand?
4. Which is the first Indian company to be listed
on the NASDAQ?
5. Following the huge success of Hotmail and its History was made in Brazil on 1st November 2010, when it elected its first
eventual sellout to Microsoft, what is the name female president. Dilma Rousseff, an economist & a former Marxist rebel who
of the new venture planned by Sabeer Bhatia? was jailed and tortured during Brazil's military dictatorship, won 56% of the
6. Which company is behind the creation of votes to head a country which is expected to become world’s fifth largest
Computer Mouse? economy by 2016. A tough & resolute bureaucrat, she’s widely recognized as
7. Which management term is derived from the Iron Lady in Brazil due to her fierce determination. Her campaign has been
Greek word which means "Art of the General"? labeled as an ode to outgoing president, Mr. da Silva’s illustrious tenure which
8. The head of this business family is conferred saw economic prosperity in the country. However, her acumen, & resolve
the honorary title of The Earl of Iveagh. Which? resulted in a former state secretary of energy of Rio Grande do Sul being
9. M.M.Hasham's family business of rice exports handpicked by Mr.da Silva, himself, as his successor. Her arrival could not
was lost when the Government nationalized it have been timed better with economy & the country, as a whole, in a good
in 1941. Undeterred he plunged into the oil shape. She has cleared first hurdle: how she takes from here, mainly in
business and founded Western India Vegetable education & poverty, remains an open question.
Products. At the time of his death his company
was doing reasonably well with their two
Answer of Quiz: 5

established brands called Sunflower and Camel.

(1)Bernard H. Bass (2) Network 18 (3) Samsung (4) Microsoft (5) HDFC bank (6) BMP
His son took over and they have now entered a Paribas (7) Lenovo (8) October 19 (9) Porsche (10) E.F. Schumacher
new field under what name?